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The Bull 'n Bear on a Tale of Two Worlds

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April 21, 2011 – Comments (0) | RELATED TICKERS: BRK-B , PBR , PTR

There are a few interesting items in today's WSJ:

Brazil raised its base rate by a quarter point to 12% and this was less than local economists were expecting/ urging! The central bank had already raised twice this year by a half point each time. What a contrast with the U.S., where interest rates are "stuck" at zero and it's not clear when the Fed will begin hike (not before 2012 appears to be the consensus). No wonder the Brazilian real has appreciated 40% this year -- the interest rate differential sets a carry trade of monumental proportions. 

Meanwhile, the WSJ also reports that China is now looking more favorably on letting the yuan appreciate against the dollar at a faster rate. The problem -- as in Brazil -- is existing inflation and the threat of more to come.

Both of these situations are emblematic of macroeconomic global imbalances of the sort that fueled the financial crisis. Surplus countries need to recycle their reserves into dollar assets, whether in Treasury securities -- lowering U.S. rates in the process -- or through their banking system, whereby the funds found their way back into U.S. credit markets. No wonder the IMF looks more kindly on capital controls these days! (For more background on global imbalances and the financial crisis, see this paper co-authored by Ken Rogoff).

Enjoy your day!

Alex Dumortier

Word count: 227

 

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